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The Ground Floor

Promus Held Such Promise, but Execs' Departures Raise
Questions About the Lodging Industry's Health

By

Peter Slatin

Aug. 17, 1998 12:01 a.m. ET

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T he sudden quadruple resignation early this month of two top executives and two directors of
Promus Hotel Corp.
shook the already shaky lodging industry and raised a disturbing question: Do the departures reflect only the basic differences of management outlook and personality between managers from two merged companies, or does the upheaval signal deeper fissures in the industry, with companies under pressure to expand both market share and earnings as the business approaches the crest of its cycle?

The resignation announcement came just shy of a year after the heralded "merger of equals" between Promus and Doubletree Hotels set the stage for what was expected to become a franchising powerhouse, built on the strong platforms of Promus's Embassy Suites, Hampton Inn and Homewood brands, along with Doubletree's luxury brand.

What caused the blowup? "Doubletree wanted to just grow and solve problems later," according to one industry dealmaker. "Promus wanted everything to be perfect. This was a merger of equals that should never have happened."

An unusual twist to the resignations is that the exiting executives and directors come from both camps, indicating that neither side prevailed. Departing are Raymond Schultz, the chairman and chief executive officer and the reigning hand from the Promus side, and Richard Kelleher, president and chief operating officer, a fiery personality who had come to Promus in the Doubletree deal. Schultz and Kelleher were joined by one board member each: Promus's former chief executive, Michael Rose, and Doubletree's former co-chairman, Richard Ferris, the onetime airline executive who assembled the ill-starred Allegis conglomerate. Kelleher receives a severance package of nearly $2.4 million from Promus, which comes on top of a $600,000 severance package from Doubletree. Schultz's take-home cash came to $3.3 million. Rose gets $1.8 million. All four men have also received significant stock-option packages.

A major reason for the Doubletree acquisition by Promus was the creation of a successor for Schultz. Now, though, with Promus having announced that it will look outside the company for new leadership, "There's nobody to run the show, and that doesn't make other top managers happy," says the dealmaker. "There's a lot of dissension and turmoil."

The Promus-Doubletree merger a year ago created a $4 billion franchise-oriented hotel company. It joined the innovative Promus with the more acquisitive Doubletree, and added a fourth brand name to the Promus stable. Doubletree was the creation of financiers rather than hoteliers, led by dealmaker Peter Ueberroth along with Ferris and Dale Frey of GE Pension Trust. Their focus differed drastically from the brand-building, detail-minded Promus team, which pioneered a full-money-back customer guarantee for its proprietary brands, a guarantee that it has withheld from Doubletree's properties. While some analysts are adamant in describing the company's problems as purely internal and unrelated to market pressures, it's worth noting that the merger itself grew out of a full-speed-ahead market and the company's current problems could be a sign of difficulties that have already begun to affect the entire sector.

Bjorn Hanson, chairman of the lodging and gaming group at PricewaterhouseCoopers, says that most lodging companies will face slowing growth. "Although demand continues to grow at robust levels, supply is increasing even more than demand," he explains. Occupancy rates started to decline at the end of last year, which has led to less aggressive rate increases this year, Hanson reports. In turn, "Our forecast is that revenue growth will be less than inflation for four of the five standard industry rate categories in 1999. The only exception is luxury, where construction started later and takes longer. But we'll get there with luxury."

Lodging had been a favored investment sector until just six months ago, when multiples began to slide. "The easy money has been made, and now is when it gets really challenging," declares Jason Ader, lodging analyst at Bear Stearns. Despite slowing revenue growth and signs of a small economic slowdown, he notes, there is a 7% increase in hotel rooms under construction nationwide. "If you overlay economic conditions with lodging demand, I'm not sure the economy is going to support that amount of new capacity. The risks in the industry are much higher this late in the cycle."

Despite the obvious difficulties facing Promus's remaining management and board members in choosing new leadership, and perhaps a new direction, not everyone is bearish about its prospects. "It's a very tough situation for a very good company," says Thomas McConnell of Insignia Hotel Partners in Manhattan. "They have wonderful brands and a solid company on both sides, and a tremendous future. But they need leadership that can move the company forward."

Most speculation is that leadership will come through a takeover. But with the exception of
Marriott International
, the three most commonly named companies --
Hilton Hotels
,
Starwood Lodging
and
Patriot American Hospitality
-- are all facing valuation problems of their own. Their share prices have been battered by the same growth pressures that brought Promus and Doubletree together in the first place. Hilton is being punished for failing to grow as advertised, beginning with the losing battle over Sheraton. Starwood, which won that battle and bought Westin Hotels as well, is being penalized for a perceived blockage in its digestive tract. Patriot, too, is being punished for not having its house in order despite having bought properties as fast as possible. Dealing from these weakened hands, it seems unlikely that any of these companies will be able to mount a swift and successful buyout of Promus. Another interested buyer, franchise giant
Cendant
, is facing difficulties over accounting irregularities.

Some observers see a dark horse in Michael Leven, the chairman of tiny
U.S. Franchise Systems
. With a market capitalization of close to just $100 million and a track record as a franchise operator, Leven and his company could be a good fit for Promus. Along with Leven to fill the vacant executive chair, the buyers would also get his company's hold on Microtel, a budget-minded franchise that would add to rather than duplicate Promus's roster. "The brands fit well, and it works," one analyst told Barron's .

Peter Slatin is a free-lance writer.

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Promus Held Such Promise, but Execs' Departures Raise
Questions About the Lodging Industry's Health

T he sudden quadruple resignation early this month of two top executives and two directors of Promus Hotel Corp.

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